Headline: �C.A.R. [California
Association of Realtors] reports sales decrease 27.8 percent in April,
median price of a home in California at $597,640, up 6.2 percent from
year ago.� Then we also read, �Throughout the state inventory levels
have increased to their highest levels in recent years��

The report does provide
some clue: �Although the median price of a home in California
continues to rise, this reflects the fall-off in sales in the
lower-priced markets of the state�� The phenomenon mentioned in the
last sentence is noteworthy and the gain in the �medina price�
reported for the state, as well as in some counties, masks the reality
of broad-based price declines if one wanted to know what is happening to
the price of the same home compared to last year or the past two
years.

When it comes to any
economic data series it is very important to keep in mind as to what is
being measured and how. If ever there was truth in the adage � The
Devil Is In the Details � what is happening to the home prices in
California is a good substantiation of that. When things don't add up
it pays to look carefully. And I have.

I will endeavor to show
that there are three factors that result in overstatement of the median
price of resale homes because the characteristics of the median
priced home are not the same as the median priced home sold a year, or
two years, ago:

1. The size of
the homes being sold recently is larger compared to those sold last
year.

2. The area mixture
of the homes sold recently is significantly different from those of the
year ago whether we look within the state or within the counties where
the median price shows YoY gains. The rapidly increasing gap between the
Haves and Have-nots in the US shows up very clearly in the latest
California home sales data.

3. The modernization
(or home improvements in layman�s term) of the homes sold recently is
significantly greater than that of year, or two years, ago.

I plan to support the
first two with the hard data and for #3 one can rely on media reports
and anecdotal evidence that suggest that sellers are making lot more
improvements in order to sell homes today even in areas where sales are
strong, e.g., Palo Alto, because the sellers want to increase their
chances in a slow sales environment.

Let us begin with a
cursory, under-the-hood, look at the prices in various counties as shown
in Table 1.

As much as there is lot
of red ink in Table 1 it does not tell the true story of the real price
declines because it does not tell you what were the characteristics of
the median-priced homes sold this year versus the median-priced homes
sold last year in any of the counties. I will try to show that the price
decline might be understated by 10-15% if one were to keep the
characteristics constant, i.e., apples-to-apples comparison!

It is abundantly clear
from the above table that YoY price gains, as well as new price peaks,
are concentrated in LA County and four of the SF Bay Area counties,
where a higher percentage of state�s Haves (top 5% income households)
live (shown in gold). What is happening in Santa Clara County, a proxy
for Silicon Valley, tells the story of all the areas with YoY price
gains very well and I happen to keep detailed data for the county so I
will make my case by providing these details.

The figure
above tells a very different story of Santa Clara County housing than
the one told by YoY price gain in the median price of homes sold as well
as new all-time high in the price reported for April 2007. The serious
decline in the listing price shown above is consistent with the steady
rise in inventory for the past two years if one keeps seasonality in
mind. Believe it or not the median price of the Active Listings
(excluding Pending Sales) hit a multi-year low of $750,000 on the
morning of 05/26/07. The high of $898,000 was reached during March 2006.
For the past two years we have roughly 150% increase in inventory and
40% decline is sales.

The entire decline in
sales volume for the past year, some 20%, is concentrated in the zip
codes in the bottom 2/3rd as ranked by the median sale price.
The homes in the top priced areas are selling briskly and in the bottom
priced areas they sit on the market for a very long time. How wide is
the gap? Let me quote Richard Calhoun, a Realtor in the area:
�Currently, largely because of the sub-prime lender issues, the
expensive homes are selling much more rapidly (35 DUI) than the low
priced homes (300 DUI). Consequently, the number of listings available
on the low-end of the price spectrum is high and listings available on
the high-end of the price spectrum are low. The bulk of the median List
price drop that you are reporting is a result of the change in the
market mix and nothing to do with property values.�

I agree with Mr.
Calhoun that the �bulk of the median List price drop� is due to the
mix of homes that are listed, but part of the price decline shown in the
median price of the Active Listings is real, i.e., for the county as a
whole the home prices have declined if we compare the same homes in the
same areas. This does not mean that there are no zip codes where there
is some price appreciation, though only modest.

Now, I will endeavor to
estimate how much of the overstatement in the median price is due to the
three factors mentioned at the beginning of this report. Table 3 below,
based on data published by DataQuick/ San Jose Mercury News, is an
attempt at arriving at a figure.

Table 3:
Price Changes Due To size and Area Mixture Over the Past 43
Weeks, Santa Clara County

For
the 43 Week Period

SANTA CLARA

[Four Weeks]
through 05/10/2007

"Median"

Increase

Price
Per SqFt

COMBINED

Median
Price

Sales
Volume

SqFt

In
SqFt

Gain
Due to

size
Incr &

Community

Price

%
Chg*

$/SqFt

#
Sold

YoY
%

95W Chg

Area
Mixture

Area
Mix

All homes

$710,000

4.4%

$477

1,855

-19.9%

-38.8%

1488

2.8%

Total resale
houses

$800,000

7.7%

$506

1,189

-19.4%

-42.1%

1581

3.4%

5.5%

9.1%

Total
condominiums

$527,000

5.4%

$431

413

-29.4%

-50.9%

1223

5.1%

Total new homes

$675,500

3.9%

253

-0.4%

40.7%

Anuual

4.2%

6.7%

11.1%

SANTA CLARA

[Four Weeks]
through 7/14/2006

Median
Price

Sales
Volume

Community

Price

%
Chg*

$/SqFt

#
Sold

YoY
%

All homes

$690,000

6.2%

$477

2,154

-23.6%

1448

Total resale
houses

$771,500

10.2%

$505

1,364

-28.2%

1528

Total
condominiums

$501,500

6.7%

$431

492

-30.5%

1163

Total new homes

$599,000

-10.7%

298

41.2%

The 43-Week period
chosen is strictly because I didn't save the data corresponding to the
52-Week change. It is an amazing coincidence that the price per SqFt (PPSF)
for all the three categories is nearly identical for the two periods
listed in the table. If the median price is up and the PPSF is the same
then we reach an easy conclusion that homes sold in all three
categories, county wide, are larger today than 43 weeks ago. A more
difficult task is to come up with a figure for the increase in the
median price due to change in the Area Mixture. Fortunately, with the
availability of the PPSF and the volume of sales for each of the zip
codes and the fact that the PPSF for all the zip codes combined is the
same, for both periods, we can calculate the price change due to Area
Mixture by comparing the weighted average price (weighted by % of total
sales in a given zip code). This is shown under �Gain Due to Area
Mixture.� As you can see in the last column the gain in the median
price due to size and Area Mixture is 9.1% for the 43-Week period
considered. This annualizes to 11.1%

The contribution of
home Modernization to the increase in median sale price can’tbe
estimated from data because I know of no data that is available. My best
guess is 2-5% compared to year ago. It is a safe conclusion that the
changes in the homes being sold today versus a year ago account for
10-15% gain in the median price. This applies to Santa Clara County,
based on the calculations and estimate, but I believe that it reflects
what is going on statewide as well as in most counties. The percentage
overstatement might differ from county to county and zip code to zip
code.

This conclusion does
not preclude the probability that there are some zip codes where there
is some real home price appreciation. I would estimate the number of
these zip codes to be no more than 50 for the state, or to less than 5%
of the zip codes. Segregating educational opportunity by zip codes is a
neat American trick. I doubt that there is any civilized nation on earth
with greater inequality of educational opportunity, K thru12, than in
America based overwhelmingly on the income level of the parents. Little
wonder that the gap between the Haves and Have-nots keeps increasing. I
hope that you understand that these comments have everything to do with
home prices.